Selecting a Business Structure

Choose the Right Business Structure for Your Business Entity:

Whether you choose a sole partnership, a limited partnership, a LLC, a family limited partnership (FLP), a corporation or a general partnership, the legal business formation of your company will determine who or what can own your company, what personal assets are at risk and how you account for your company’s profits and losses. Consulting a business lawyer, such as our Law Offices of Michael T. Baker, is the best first step.

Sole Proprietorship

A sole proprietor is created when a person simply begins a business. It is easy, relatively inexpensive and a common choice for an entrepreneur. The sole proprietor owns all of the business assets. He or she is taxed on income from the business at his or her applicable individual tax rate on Schedule C of his or her personal return. A significant disadvantage of a sole proprietorship is the owner’s liability is extended not only to the debts of the business, but also to all lawsuits brought against the business.

General Partnership

A general partnership is formed when two or more people become co-owners of a business for profit, regardless of whether it is formally registered with the government. Each general partner participates in management, co-owns the assets and shares in the profits and losses. Similar to a sole proprietorship, each general partner is personally liable for business-related obligations. While a partnership files an informational return, a partnership does not pay taxes. Instead, the profits of the partnership pass through to the partners’ individual tax returns.

Limited Liability Partnerships (LLP)/Family Limited Partnership (FLP)

A Limited Liability Partnership (LLP) is when at least one partner manages the business as a general manager or partner, while at least another partner is a limited partner who contributes capital. The limited partner’s liability is limited to the cash or property contributed to the partnership, and not to management’s decisions on how the business is managed. By establishing a FLP or LLP, clients can benefit from certain estate tax discounts which are available through a properly maintained FLP or LLP. These legal entities help to facilitate the gifting transition of property to protect assets for the next generation. An LLP or FLP is taxed much like a general partnership.

Limited Liability Company (LLC)

A Limited Liability Company (LLC) combines the elements of partnerships and corporations. The owners, called members, risk losing property that has been invested into the LLC. The assets of the LLC are used to pay the company’s debts. An LLC is not necessarily a separate tax entity, although a separate tax return is often prepared. Similar to a partnership, the profits and losses of the LLC pass through to the individual owner’s tax return.

Corporation

A corporation is a separate legal and taxable entity from its owners. It is formed in accordance with the state laws in the state in which it intends to operate. With certain exceptions, owners of the corporation are protected from the corporation’s liabilities and their exposure is generally limited to the assets contributed to the corporation.

Choosing an S-Corp or a C-Corp

There are two types of corporations for tax purposes: S-Corporations and C-Corporations. The primary distinction between the two is that the profits and losses of an S-Corp are not taxed at the corporate level, like they are at a C-Corp level. In order to elect to be treated as an S-Corp, the number of owners is limited and the the types of owners is restricted.

In contrast, a C-Corp’s profits are taxed at a corporate rate and the dividends paid to shareholders are taxable at the shareholders’own tax rates. For this reason, the profits of a C-Corp are often considered to be subject to “double taxation.”   Despite this potential for double taxation, a C-Corp remains a preferred entity for many business owners, due to its other advantages.

Please contact us or call: 508.429.6000 ext. 13 with your Massachusetts business formation questions.